Six takeaways from proposed FATCA rules issued by the U.S. Treasury Department & IRS

The U.S. Treasury Department and IRS recently released nearly 400 pages of proposed regulations that detail their plans to implement the Foreign Account Tax Compliance Act (FATCA), which becomes effective on January 1, 2013. The proposed rules are intended to prevent U.S. taxpayers who hold financial assets in non-U.S. financial institutions and other offshore accounts from avoiding their tax payment obligations.

Overview

Under FATCA, certain U.S. financial institutions, foreign financial institutions (FFIs), and non-financial foreign entities are required to report information about offshore accounts and investments held by U.S. taxpayers to the IRS annually. These institutions include banks, insurance and real estate companies, hedge funds, mutual funds, and private equity firms. FFIs must enter into agreements with the IRS. If they fail to enter into such agreements to report U.S. accounts, they will face a 30-percent withholding charge.

We’ve taken an early look at these proposed rules and identified six points that top financial services executives should likely consider before diving deeper into these new regulations. We will follow up with more analysis in the days to come.

The rules simplify due diligence procedures for certain accounts

The Treasury Department has modified due diligence procedures around pre-existing accounts to permit FFIs to rely on electronic searches for accounts ranging from $50,000 to $1 million. For accounts with a balance of more than $1 million, FFIs will have to do paper searches that would be limited to documentation, current account files, and certain correspondence. FFIs would also be required to question any relationship managers associated with these accounts to confirm that they don’t have any knowledge that the client is a U.S. person. Searches are not required for accounts of less than $50,000 or for certain insurance contracts or entity accounts of less than $250,000. In many cases, including most instances of new account onboarding, banks would be able to rely on know your customer (KYC) and anti-money laundering (AML) rules they already have in place.

The rules provide some relief around reporting

The proposed rules give FFIs additional time to make adjustments to their systems for reporting U.S. income. Through 2014, FFIs would only have to provide identifying information (name, address, taxpayer identifying number, and account number) and the account balance or value of the U.S. accounts. Beginning in 2016, they will be required to report income. By 2017, the full transactional reporting will be required.

Treasury has extended the period for “grandfathered” obligations

The proposed rules extend the grandfathered period for certain obligations, such as debt securities, that would be exempt from the FATCA withholding tax requirement. The period has been extended to January 1, 2013. This means that any obligation issued by an entity before this date would not be subject to the withholding requirement as long as the terms of the obligation have not been materially modified. Previously, obligations issued before March 18, 2012, would not have been subject to the requirement.

The rules give members of expanded affiliated groups more time to comply

These rules would add a three-year transition period to the expanded affiliated group requirement to comply with FATCA. The rules previously required that each FFI in an expanded affiliate group needed to sign up either as a participating or deemed compliant FFI in order for FFIs to be in compliance – meaning none could participate if even one affiliate could not satisfy the requirement. The new rules now provide additional time for affiliates that are in restricted countries to enter into agreements. However, restricted FFIs will still have to go through due diligence requirements with respect to their accounts. And if they receive “withholdable” payments, then they will be subject to withholding during this transition period.

U.S. enlists help from five EU nations on tax evasion

At the same time Treasury released the proposed rules, the United States announced an agreement with five European governments to help combat tax evasion. France, Germany, Italy, Spain, and the United Kingdom said they would jointly develop a framework to collect and send information about offshore accounts held by Americans from their banks to the IRS. Once the framework is finalized, banks in those countries would not have to enter into separate agreements with the IRS. In return, the United States would collect and share information with those five countries about accounts held by their citizens in U.S. financial institutions. However, financial institutions in other countries must still enter into agreements with the IRS on their own.

These are proposed regulations, not final ones

The rules released by the Treasury Department and IRS are not yet finalized. Industry can still submit written or electronic comments to the Treasury Department and IRS by April 30. A public hearing is scheduled for May 15.

There’s a lot more to know about the proposed FATCA rules. Deloitte1 will release a more in-depth look at the rules and their implications in the coming days. In the meantime, these high-level takeaways aim to offer some context to help financial services executives begin to understand how FATCA is evolving.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.